Hedge Funds Raise Gold Wagers as Yamada Sees $1,000: Commodities

By Elizabeth Campbell and Debarati Roy -
Jan 7, 2014

Hedge funds raised their bullish gold
bets to a six-week high, splitting with analysts at Technical
Research Advisors LLC and Goldman Sachs Group Inc. who are
predicting more declines after last year’s rout.

The net-long position in gold jumped 19 percent to 34,104
futures and options in the week ended Dec. 31, U.S. Commodity
Futures Trading Commission data show. Short holdings slid 4.6
percent to 72,571, the lowest since Nov. 19. Net-bullish
holdings across 18 U.S.-traded commodities fell for the first
time in six weeks as investors became the most bearish on sugar
since September.

Gold tumbled 28 percent in 2013, the first decline in 13
years and the biggest since 1981, after some investors lost
faith in the metal as a store of value. The Federal Reserve on
Dec. 18 cut the pace of its monthly bond purchases. Bullion is
poised to fall another 19 percent in the coming months to $1,000
an ounce, said Technical Research’s Louise Yamada, who’s the
former head of technical research at Citigroup Inc.

“With gold, in the short-term, we’re being pulled in
multiple directions,” said Michael Cuggino, who manages about
$10 billion of assets at Permanent Portfolio Family of Funds
Inc. in San Francisco. “There were sellers trying to get out in
front of the tapering. Physical demand is OK, but not strong.
You also have increasing economic activity, which could begin to
accelerate inflation.”

Price Slump

Futures in New York climbed to $1,247.70 yesterday, the
highest since Dec. 16, as last year’s rout made the metal
attractive to buyers of coins, bars and jewelry. Prices slumped
25 percent in the past 12 months, as the Standard & Poor’s GSCI
Spot Index of 24 raw materials slid 5.2 percent, while the MSCI
All-Country World index of equities advanced 16 percent. The
Bloomberg Dollar Index, a gauge against 10 major trading
partners, rose 3.7 percent. The Bloomberg Treasury Bond Index
fell 2.5 percent.

Bullion fell to $1,181.40 on Dec. 31, within $2 of the 2013
low reached in June. Prices rebounded partly as some investors
closed out bearish wagers, Cuggino said. Fifteen analysts
surveyed by Bloomberg News expect gold to rise this week, two
are bearish and four neutral, the highest proportion of bulls
since December 2012.

While short-term rallies may occur, a head & shoulder
pattern signals that gold will extend its declines, Yamada of
Technical Research said. A drop to $1,000 would mark the lowest
intraday price since October 2009.

‘Very Weak’

“The market still looks very weak,” Yamada said in a
telephone interview from New York. “There is potential for
further declines, and it’s too early to say if the market has a
double bottom in place.”

Prices are “likely to grind lower” through 2014, Jeffrey
Currie, the head of commodities research at Goldman Sachs in New
York, said in a telephone interview Dec. 19. The metal will
reach $1,050 by the end of 2014, the bank said in a Nov. 20
report.

Gold surged more than 500 percent in the 12 straight years
of gains through 2012 as the dollar weakened. The rally
accelerated from December 2008 to June 2011 as the Fed expanded
its balance sheet through debt purchases and held borrowing
costs at a record low in a bid to revive growth amid a U.S.
recession. Bullion reached a record $1,923.70 in September 2011.

Fed Taper

Fed officials said Dec. 18 they would trim monthly
purchases of bonds to $75 billion from $85 billion starting this
month. The central bank will probably reduce its quantitative
easing in $10 billion increments over the next seven meetings,
before ending the program in December, according to the median
estimate of economists surveyed by Bloomberg on Dec. 19.

“Gold is at a bit of a crossroads here,” said John Kinsey, who helps manage about C$1 billion ($935 million) at
Caldwell Securities Ltd. in Toronto. “Bullion still seems to be
in demand for jewelry and different things. We’re cautiously
optimistic. If it breaks through this current level near $1,200,
that would be very bad.”

Assets in exchange-traded products backed by bullion fell
33 percent since the end of 2012 to the lowest since October
2009. The removals, along with slumping prices, erased $71.9
billion in the value of the assets. Billionaire John Paulson,
the largest holder in the SPDR Gold Trust, the biggest ETP, said
on Nov. 20 that he personally wouldn’t invest more money into
his gold fund because it’s not clear when inflation will
quicken.

Crude Bets

Bullish bets on crude oil climbed 2.4 percent to 270,386
contracts, the highest since September, government data show.
The CFTC data, regularly released on Fridays, were delayed last
week because of the New Year holiday.

Freezing temperatures across the U.S. may ignite energy
demand this week as consumers use more fuel to heat their homes.
The U.S., the world’s biggest oil user, consumed about 18.6
million barrels a day of oil in 2012, or about one-fifth of the
global total, according to BP Plc’s Statistical Review of World
Energy.

Speculators increased their net-long position in copper by
21 percent to 35,635 contracts. That’s the most bullish outlook
since February 2011. Stockpiles monitored by the London Metal
Exchange are at the lowest in almost a year.

Record Harvests

Record harvests from India to the U.S. have expanded
supplies. Morgan Stanley and Rabobank International lowered
their outlooks on farm goods last month. Corn growers in the
U.S. probably harvested a record 13.989 billion bushels in 2013,
and global production climbed 12 percent to an all-time high,
the U.S. Department of Agriculture said Dec. 10.

Investors are holding a net-short position in corn of
94,812 contracts and have been bearish on the grain since July.
Prices in Chicago tumbled about 50 percent from an all-time high
in August 2012.

Net-short wagers in wheat increased to 71,468 contracts
from 69,832 a week earlier. The holdings are within 0.3 percent
of a record bearish position reached Dec. 17. U.S. winter-wheat
acreage rose to the highest in six years, according to a survey
of as many as 18 analysts by Bloomberg News. The USDA will
release its estimates on Jan. 10.

“I don’t really see a lot of investors clamoring to want
to own commodities in a major way,” Michael Strauss, who helps
oversee about $26 billion as chief investment strategist at
Commonfund in Wilton, Connecticut, said in a telephone
interview. “It’s hard to argue on a short-term basis that it’s
the place of investment opportunity. There’s still excess
capacity in a lot of areas.”